Customer Lifetime Value (CLTV) Definition
Customer lifetime value (CLTV) is the present value of the future cash flows or the value of business attributed to the customer during his or her entire relationship with the company.
Essentially, by applying the Customer lifetime value (CLTV), marketing managers are able to determine the dollar value associated with the long-term relationship with anyone customer. This is an especially useful metric when a business is acquiring a new customer.
Ideally, you want a large lifetime that is greater than the cost of acquiring a new customer. This is also known as the break-even point.
For many marketers, this is an all too familiar scenario: you launch a new campaign and a deluge of new users sign up for your service. So you turn up your ad spending but suddenly your returns flatline.
How to Calculate Customer Lifetime Value (CLTV)
First, you need to calculate the Lifetime Value of your customers.
To determine the lifetime value of a client, you will need to look at repeat customers. One-time buyers obviously have a much lower lifetime value than a repeat customer.
In order to do this, you simply take the single sale average and multiply it by the repeat transaction average and the retention period average.
Of course, this only looks at customers in terms of gross revenue and doesn’t take into account operating expenses – how much does your product cost to make, how much are you spending on an advertisement, and how much does it cost to manage your operations?
So, to calculate Customer Lifetime Value, you must account for these numbers. The math, as shown above, is again relatively straight forward:
Customer Lifetime Value Formula:
Customer Lifetime Value = Lifetime Value x Profit Margin
How to Increase Customer Lifetime Value
So, the main factors that you can influence are:
- Average Transaction Value
- Number of Repeat Sales
- Average Customer Retention Rate
If you can increase any of these factors then your CLTV will go up. That means that the factors that can maximize your lifetime value for each customer are things like:
- Boosting transactions for each sale (cross-selling)
- Encouraging more frequent transactions
- Promoting the purchase of more expensive items
- Enjoying a longer-term business relationship
So, what are some tricks for increasing your customer lifetime value rate?
#1. Ask Questions
The last point is the most powerful and effective way of maximizing your customer lifetime value. Up-selling and cross-selling are fine tools, but only by dedicating energy to your customer retention strategy can you really see your CLTV grow.
Developing effective strategies for improving customer loyalty will promote long-lasting relationships. That causes customers to stick with the brands they know because they want to.
This is often referred to as “customer optimization.” Essentially, you continuing the marketing process even after the acquisition has been made in order to connect the user to the brand.
One interesting way to engage with your customers and drive loyalty is through customer feedback surveys.
As Survicate points out, “website surveys allow you to collect feedback from your visitors directly, understand their behavior and motivations and find out how they respond to your content or offer – they help you understand why visitors behave as they do.”
Here are a few other examples of ways to go about this:
- Customer wish lists
- Loyalty programs
- Repeat customer discounts
- Limited-time offers
#2. Stay Relevant
Remaining top of mind is another effective way of boosting the number of repeat transactions you receive.
If your brand is considered relevant, the more likely customers are to think of you when they’re considering making a purchase.
It’s a good idea to generate high-quality content consistently on your site and stay active on social media. One interesting way that some companies have been achieving this is through the use of influencers.
An influencer is a person who will advertise your product – among others – on their own social media platforms. The majority of consumers – 60 percent – say they have been influenced by a social media post or a blog review while shopping.
#3. Cross-Selling and Up-Selling With Value
Offering additional products and services are a great way to boost your average shopping cart while also building customer loyalty. It also impacts your cart abandon rate to go down.
Amazon has proven particularly prescient at this, offering with its Prime program premium delivery services, exclusive discounts, and a massive video catalog.
Essentially, they’re keeping their brand at the top of their customers’ minds by offering them additional products at a discount rate.
#4. Boosting Customer Service
The idea here is that you continue to take care of your customers even after they’ve made their purchase. Customer satisfaction is the key to your business success. These can often be seen as services that transform a recent customer into a repeat customer.
FURTHER READING: Customer Satisfaction: That’s Why It’s Still Important in 2020
By listening to complaints, offering advice, and providing solutions to customer problems you can ensure these people return to your brand time and again.
#5. Loyalty Programs
Loyalty programs are a popular way to increase customer lifetime value. Indeed, they have proven to improve sales and help keep customers coming back.
- Loyalty programs boost overall revenue by 5-10%.
- Loyalty members spend 5-20% more on average than non-members.
- Loyalty program members make 5-20% more purchases than non-members.
This approach takes existing customers and rewards them for staying in the business relationship longer. It can also be used to identify who the most valuable customers are in general.
Each of these methods will help you maximize your customer lifetime value, as well as bolster your long-term success rate.
In order to get the most benefit from your customer lifetime value optimization efforts, you need to measure the impact in order to identify which tactics work the best.
Perhaps your company benefits the most from strong buyer feedback, or from good customer service. Some businesses might see the most bang-per-buck after creating a stellar loyalty program.
The final strategy that you employ entirely depends on what works best for you. Keep trying new things and measure those efforts accordingly until you find your optimal CLTV formula.